India set for strong growth in FY25 amid global headwinds: Finance ministry

India’s economy is performing well, with risks evenly balanced, to achieve 7% growth in FY25, but geopolitical tensions and geo-economic fragmentation pose risks to the country’s growth, the finance ministry said in its latest monthly economic review.

In its economic review for January, the ministry said risks to global trade, including a spike in commodity prices due to the Houthi militant group’s attacks on important trade routes in the Red Sea region, have resulted in supply chain disruptions.

Also, persistent underlying inflation in developed countries could extend tight monetary conditions, the ministry said in the review, released on Tuesday. 

During the Reserve Bank of India’s latest bi-monthly monetary policy committee meeting, the regulator projected a real GDP growth of 7% for FY25, up from its previous forecast of 6.6%, while maintaining its benchmark lending rate at 6.5% for the sixth consecutive time.

RBI’s growth projections for FY25 include a growth rate of 7.2% in Q1, 6.8% in Q2, 7% in Q3, and 6.9% in Q4.

“Prospects of healthy rabi (winter crop) harvesting, sustained manufacturing profitability and underlying service resilience are expected to support economic activity in FY25,” the ministry said.  

“On the demand side, household consumption is expected to improve, while prospects for capital formation are bright owing to an upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates, and the government’s continued thrust on capital expenditure,” it added.

India remains the fastest-growing major global economy, ahead of the US, China and other major advanced nations. 

Advanced economies, hurt by persistent inflation, have kept their repo rates high—affecting Indian exports. A higher repo rate, which is the interest rate at which the central bank lends money to banks, makes debt and debt-servicing more expensive, thus slowing economic activity. 

Conflicts in Ukraine and West Asia have further threatened to push up commodity oil prices, leading to greater inflationary pressures globally.

In India, though, policy measures by the government and the transmission of monetary policy tightening have helped rein in inflation, the finance ministry states in its January economic review.

“With the stable downward movement in core inflation and moderation in food prices, the outlook for a reasonably low headline inflation rate is good,” it said. “It is expected that food inflation will moderate further in the upcoming months.”

Retail inflation fell to 5.1% in January from 5.7% in December aided by a slower rise in food prices. It still remains above the central bank’s target of 4%, but has stayed within its tolerance range of 2-6% for a fifth consecutive month.

Overall, food inflation fell to 8.3% in January from 9.53% in December. 

The finance ministry expects the average crude oil price for the Indian basket for FY24 (up to 12 February 2024) at $82.2/bbl, lower than the average of $93.2/bbl in FY23. 

“Lower input prices and overall inflation can influence output growth positively, which in turn can further improve the prospects for exports,” the ministry said. 

“Given persisting uncertainties for global output and trade growth, finding ways to enhance the competitiveness and attractiveness of India’s exports is both urgent and important,” it added.